The Panama Canal Expands: What Does This Mean for Global Container Shipping?

The COSCO Shipping Panama navigated through the Panama Canal this past Sunday, June 26, 2016, marking the inaugural passing of a megaship through a new lane that can now accommodate ships carrying up to 14000 TEUs.

This is a poignant moment reflecting over 100 years of change in shipping. When the Panama Canal was completed in 1914, it was hailed as one of the greatest achievements of the 20th century - becoming an emblem of American ingenuity. Today, we live in a vastly different world. China has replaced the U.S. as the world’s largest trading nation and megaships will become the future of shipping. The United States is still the Panama Canal’s most important user, but it was a Chinese megaship that made the first official transit through the revamped canal this Sunday.

What hasn’t changed is that the Panama Canal is still significant to world commerce. About 5 percent of the world’s shipping traffic passes through, and 70 percent of that cargo is going to and from the U.S. By expanding the Canal and building new locks for post-Panamax megaships to pass through, the Panama Canal is once again about to influence the patterns of global trade.

West Coast = Best Coast?

Let’s first turn our attention to U.S.-Asia trade, one of the most important sources of business for the Panama Canal. Now that megaships embarking from Asia will be able to pass through the Panama Canal and go straight to the East Coast, it has intensified the competition between the East Coast and West Coast ports.

The West Coast attracts approximately 65 percent of container shipping volume from Asia, which is unloaded at the terminals and then sent on its way through railways or roads. In 2014-2015, drawn out labor strife on the West Coast led to the flight of cargo volume eastward. Much of the business transitioned back to the West Coast after the disputes were settled, but not all: the East Coast has already chipped away at the West Coast’s market share.

It takes 18 days to ship goods from Asia to the densely populated U.S. East Coast through West Coast ports. It will take 22 days for cargo to reach the same destination by sea through the Panama Canal. For goods that are not time-sensitive, the new maritime route for megaships to travel from Asia to the East Coast through the Panama Canal presents a cheaper, albeit slower, alternative.

The Boston Consulting Group and C.H. Robinson estimate that 10 percent of cargo from Asia could transition to the East Coast route with the expansion of the Panama Canal. Some analysts, though, are not convinced about an immediate or significant shift of cargo volume to the East Coast. The industrial real estate brokerage CBRE says that while some carriers are considering the option, it’s a complex calculus to make the switch and that East Coast ports are simply not ready to handle the bigger ships. But, once they catch up to the West Coast on infrastructure, there will be a gradual shift toward East Coast ports.

Ports up and down the East Coast have already been investing in infrastructure that will enable them to accept post-Panamax ships. The Port of New York and New Jersey has initiated a project to raise the Bayonette Bridge. It has been delayed more than once, but is now slated to be complete by late 2017. Meanwhile, the Port of Charleston is planning to dredge its 45-feet-deep harbor to a depth of 52 feet by 2020. But getting ready for bigger ships also means deploying taller cranes and increasing access to railroads, among other things. We will have to wait to see how the U.S.-Asia trade plays out and whether East Coast ports will be able to wrest away a larger share of the market from the West Coast.

The Suez Canal: A Competition of Global Proportions

The trade from Asia to the U.S. East Coast travels on only two major sea routes, either eastward through the Panama Canal or westward through the Suez Canal in Egypt. In recent years, the Suez Canal has been gaining market share over the Panama Canal, from 30 percent of the Asia - U.S. East Coast trade in 2009 to 42 percent in 2013. By 2015, the Suez Canal had captured about 50 percent of the Asia - U.S. East Coast trade.

The Suez Canal embarked on a “Great Egyptian Dream” project in 2014, spending $8 billion to widen and add more depth to the canal in order to attract bigger ships and create capacity for two-way traffic. Despite the lofty rhetoric of Egyptian officials, however, the uplift in revenue hasn’t materialized the way that they had imagined. And now, the newly expanded Panama Canal will likely recover market share from the Suez Canal.

Conclusion: The Era of Megaships

As the competition between the Suez Canal and Panama Canal as well as the West Coast and East Coast ports illustrates, the ocean shipping trade at the present moment is about paving the way for megaships. It’s a scramble to complete the infrastructure projects that will service bigger and bigger ships; the alternative is to risk becoming irrelevant. The Panama Canal, in expanding its waterways, has endeavored to place itself on the right side of history.

At AGWorld, we will continue to keep up on the latest developments on the Panama Canal and how it will affect shipping from Asia to the U.S. Don’t hesitate to contact your local AGWorld representative to discuss the most optimal shipping route for your cargo.